Morality and tax: Should standards be different at home and abroad?

Main points

Most tax professionals view tax compliance as a legal rather than a moral obligation.

Governments and politicians often contend that taxpayers have a moral duty to pay tax.

Nonetheless, the UK seems willing to play beggar-my-neighbour internationally.

Donald Drysdale asks whether the UK is playing fair with poorer nations in its double tax treaties.

Morality and tax

Many tax practitioners will identify (as I do) with the views expressed by leading tax specialist Bob Crawford at the recent ICAS Tax Conference: “Tax evasion is wrong – it’s illegal and the law is the law. But I don’t see any morality in tax, or even principles – just rules.”

Chancellor of the Exchequer George Osborne is on record in his Budget speech 2012, describing aggressive tax avoidance as “morally repugnant”. A similar view on the relationship between morality and tax was expressed at the ICAS Tax Conference when opening speaker the Rt Hon Dame Margaret Hodge DBE MP, former Chair of the Public Accounts Committee, spoke of a moral dimension to paying tax – part of our contract with society.

Establishment figures like Osborne and Hodge, whether in government or opposition, are well placed to try to influence moral attitudes to tax. They have both attempted to persuade taxpayers – including multinational companies – to meet their moral fiscal obligations by refraining from tax avoidance.

This emphasis on morality in tax has caused me to wonder whether the UK can hold its head up high as a jurisdiction that practices what it preaches.

Does the UK play fair?

What do the following nations have in common: Bangladesh, Ethiopia, Gambia, Ghana, Lesotho, Mongolia, Nigeria, Sri Lanka, Sudan, Uganda, Vietnam, Zambia and Zimbabwe?

A research report commissioned by international charity ActionAid and published earlier this year identified double tax treaties between high-income and lower-income territories that deprive the lower-income countries of more taxing rights than most. In their analysis, Bangladesh came off worst, having entered into no less than eighteen treaties considered to be ‘very restrictive’.

All tax treaties restrict the right to levy tax, but some treaties take away far more tax power than others. Most existing tax treaties are based on the OECD model tax convention, which generally favours higher-income capital-exporting countries. An alternative UN model tax convention aims to give increased taxing rights to developing nations.

For the purposes of ActionAid’s research, treaties signed since 1970 were examined and given an indicative score – based on how much each treaty restricts the way the lower-income country can tax the income of global companies doing business in their territory through profits tax, withholding tax and other taxing rights including capital gains tax. A treaty was regarded as very restrictive if, using this scoring convention, it was seen to restrict severely the ability of the lower-income country to levy corporation tax, dividend withholding tax and capital gains tax on foreign companies operating in their country.

The researchers concluded that the thirteen lower-income Asian and sub-Saharan African countries listed above, from Bangladesh to Zimbabwe, have very restrictive double tax treaties with the UK. The UK and Italy were the high-income nations with the greatest number of very restrictive tax treaties entered into with African and Asian countries since 1970, followed by Germany.

In this era of aggressive tax avoidance, tax treaties play a role in the tax-efficient structuring of many multinational groups and also facilitate some of the more extreme avoidance schemes they employ. Many treaties can be used to ensure that money flows untaxed from poor to rich countries, increasing world inequality and exacerbating poverty.

Why it matters

While the UK strives to be more competitive by making successive reductions in its corporation tax rate in an inexorable race to the bottom, we’re accustomed to the notion that shortfalls in corporate tax revenues can be made up from other taxes.

This is borne out by forecasts from the Office for Budget Responsibility (OBR), published alongside the Budget on 16 March 2016. From 2015/16 to 2020/21, government receipts from corporation tax will rise by only 14%. Over the same time frame, receipts from income tax are expected to rise by 29%, from national insurance contributions by 31%, VAT by 23%, and stamp duty land tax (in England and Wales) by 63% – to quote but a few examples.

This is all very well for us here in the UK, where we have a broad fiscal base and (arguably) a relatively well-developed tax collection system. Some 30m people (46% of our total population) pay income tax. But can you imagine how different things would be in a country where the vast majority of the population lives in extreme poverty and the only taxpayers of significance are large companies? If such a country is pressured into giving away most of its rights to tax foreign companies operating within its borders, the impact on its revenues can be catastrophic.

Take Bangladesh as an example. In 2013 only 0.73% of its citizens (1.1m people out of its total population of 150m) submitted income tax returns. There should have been more (perhaps 3m people, or 2%) but many work informally or in agriculture, making it hard for the government to collect income tax. Thus the government depends disproportionately on corporate taxes.

Bangladesh is one of the world’s largest recipients’ of humanitarian aid. In 2015 the UK alone paid it a commendable £157.5m in bilateral official development assistance. But do we want to be seen to be at the forefront of a tax treaty scandal that highlights countries which give with one hand and take back surreptitiously with the other?

What can be done?

ActionAid advises lower-income countries not to sign bad tax deals with other governments that take away their taxing powers. Tax treaties are voluntary, and they can be renegotiated or cancelled. For example, in recent years Mongolia has unilaterally cancelled its tax treaties with the Netherlands and several other high-income countries because they were being used for tax avoidance through ‘treaty shopping’. In 2013 Rwanda renegotiated its treaty with high-income country Mauritius, re-establishing Rwanda’s rights to tax construction sites, business services, interest and royalty payments.

The report from ActionAid also urges high-income countries to act in a morally responsible way. It calls on their governments to reconsider urgently those treaties that restrict the taxing rights of low and lower-middle income countries most; to subject treaty negotiation, ratification and impact assessments to far greater public scrutiny; and to take a pro-development approach to the negotiation of tax treaties by adopting the UN model tax convention as the minimum standard.

From a moral perspective the findings of ActionAid’s research should not be ignored. And from a practical perspective too – since calls from the Chancellor and other politicians, seeking to persuade taxpayers to consider their moral obligations in relation to tax, may prove to be of little effect if our once-great nation persists in behaving like the playground bully.